Even though an organization is recognized as tax exempt, it still may be liable for tax on its unrelated business taxable income. An exempt organization that has $1,000 or more gross income from an unrelated business must file Form 990-T, Exempt Organization Business Income Tax Return. This is in addition to the requirement to file an annual exempt organization return.
The Internal Revenue Code provides special rules for calculating the unrelated business taxable income of social and recreational clubs that are tax-exempt under section 501(c)(7). Under these rules, clubs are generally taxed on income from non-members who are not bona fide guests of members. The fact that income derived from non-members is used by an exempt organization in furthering its exempt purpose (such as expanding the club's facilities) does not change the fact that the income is from an unrelated activity and must be reported on Form 990-T. Clubs are also generally taxed on income from investments.